Wednesday, 17 June 2009

The failure last year of major financial players like Lehman reminds us that a promise to pay is only as good as the ability of that organization to actually pay. In the case of a life annuity or some form of insurance, one must naturally ask what guarantee there is that a financial company will be around for the twenty or thirty years that an annuity may last, or who will step in if it is not.

The answer in Canada is Assuris, a not-for-profit organization to which all insurance companies are obliged by law to belong. On the failure of any company, it promises to either pay up, or more often, simply have another company take over and continue the coverage or payments. It has its own small "Liquidity" fund of $100 million and can levy up to $900 million more from its members, which it says would more than cover any failure that has occurred in the past.

Whether that would be enough to handle a failure the size of a Great-West which has obligations over $100 billion per its Q1-2009 financial report is debatable. A series of failures in a systemic and cascading crisis could happen, as very nearly happened with banks last autumn. However, as was observed then, some companies and industries are too big and critical to the economy to allow them to fail. The government steps in to provide guarantees and that is the ultimate level of protection for annuities and insurance though it is not formalized as a promise to backstop Assuris.

Assuris does only guarantee 100% of payments up to $2000 per month per insurance company, or 85% of the payment, whichever is higher (example shown here), so it is wise to split up annuities amongst different companies.